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Tomorrow is the ex-dividend date for the shares of firm Alpha. The dividends will be $1...

Tomorrow is the ex-dividend date for the shares of firm Alpha. The dividends will be $1 per share, and there are 20,000 shares outstanding. The balance sheet in market values is as follows:

Assets
Cash 100,000
Fixed assets 900,000
Total 1,000,000
Equity & Liabilities
Equity 1,000,000
Total 1,000,000

a- What is the share price of Alpha today?

b- What is the expected price of a share tomorrow?

c- Consider that Alpha announces a share buyback of $20,000 instead of paying out a dividend:

i. How will a shareholder with 100 shares, willing to sell two of his shares, be affected by the share buyback operation?

ii. Compare the effects for the firm and shareholders of the two alternatives, the share buyback and the cash dividend.

d- Consider now that Alpha changes its mind again and decides to issue a 2% dividend in shares. How would a shareholder with 100 shares be affected by the share dividend? Compare this situation with the alternative cash dividend and share buyback.

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jeff jeffy answered 1 year ago
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